Patient Protection and Affordable Care Act: HHS Notice of Benefit and Payment Parameters for 2014 Final Rule Summary March 21, 2013 On March 11, 2013, the Centers for Medicare & Medicaid Services (CMS) of the Department of Health and Human Services (HHS) published the final rule providing detail and parameters related to certain provisions of the Affordable Care Act (ACA) (see 78 FR 15410-155491): the risk adjustment, reinsurance, and risk corridors programs (also known as the Premium Stabilization Programs); cost-sharing reductions; user fees for a Federally-facilitated Exchange; advance payments of the premium tax credit; the Federally-Facilitated Small Business Health Option Program (SHOP); and the medical loss ratio (MLR) program. The final rule is effective on April 30, 2013. A detailed summary of the provisions of this final rule is provided below. Note that summaries of the Collection and Information Requirements and Regulatory Impact Analysis are incorporated in the relevant sections of the summary. This final rule covers subjects in 45 CFR Parts 153 through 158. For the most part, it incorporates the provisions of the proposed rule. Those provisions of the final rule that differ from the proposed rule are listed at 78 FR 15507-15508. Among the most significant related to the premium stabilization programs are: the addition of a description of the risk adjustment user fees that will be imposed by the Federally Facilitated Exchanges on issuers; modifications and clarifications related to the application of the reinsurance contributions and calculations of plan reinsurance payments; and a clarification that regulatory fees as well as taxes will be subtracted from premiums before calculating risk corridor targets. CMS adopts most of the proposed rules related to the advance payment of the premium tax credit and cost- sharing reduction programs, but does make several changes. It allows Exchanges greater flexibility in allocating the advance payment of the premium tax credit if one or more individuals in a tax household enroll in more than one policy through the Exchange. CMS also specifies the methodology that will be used for allocating advance payments of the premium tax credit provided through Federally-facilitated Exchanges. It permits HHS to adjust the costsharing reduction advance payment if Qualified Health Plan (QHP) issuers can demonstrate during the year that the actual reductions are likely to differ substantially from the advance payments. CMS makes a number of changes throughout the rule to clarify that Multi-State program plans will be following policies and procedures set by the Office of Personnel Management (OPM). The rule finalizes certain requirements for the SHOPs, including eligibility-related definitions and counting methods regarding small and large employers and full-time employees and allows SHOPs to selectively list only brokers registered with the SHOP. For the Federally-facilitated SHOP, operational features are established, including a 70 percent minimum participation rate. In a separate proposed rule also published on March 11, 2013 (78 FR 15553), CMS proposes to Prepared by Health Policy Alternatives, Inc.
modify previously adopted rules for SHOPs to delay employee choice and shorten special enrollment periods. With respect to the Medical Loss Ratio (MLR) standards, the final rule requires accounting for risk adjustment and risk corridor payments and receipts as adjustments to the numerator (incurred claims) in calculating the MLR, but treats reinsurance as subtractions from the denominator. CMS also delays the date for paying MLR rebates from August 1 to September 30 and allows tax-exempt issuers to deduct both state premium taxes and community-benefit expenditures for purposes of calculating the MLR, since community-benefit expenses are incurred in lieu of paying federal taxes, which would otherwise be deductible. I. BACKGROUND Table of Contents Section Page I. Background 2 II. Provisions of the Proposed Rule 4 A. Provisions of the State Notice of Benefit and Payment Parameters 4 B. Provisions and Parameters for the Permanent Risk Adjustment Program 4 C. Provisions and Parameters for the Transitional Reinsurance Program 28 D. Provisions for the Temporary Risk Corridor Program 44 E. Provisions for the Advance Payments of the Premium Tax Credit and Cost-Sharing Reduction Programs 48 F. Provisions on User Fees for a Federally-Facilitated Exchange 65 G. Distributed Data Collection for the HHS-Operated Risk Adjustment and Reinsurance Programs 66 H. Small Business Health Options Program 71 I. Medical Loss Ratio Requirements 76 In March of 2012, HHS published the Patient Protection and Affordable Care Act: Standards Related to Reinsurance, Risk Corridors and Risk Adjustment Final Rule (Premium Stabilization Rule) (77 FR 17220) and the Establishment of Exchanges and Qualified Health Plans; Exchange Standards for Employers Final Rule (77 FR 18310). These rules implement standards for Affordable Insurance Exchanges (Exchanges), states, and health insurance issuers related to the reinsurance, risk adjustment, and risk corridors programs established by the ACA and the establishment of Exchanges and qualified health plans (QHPs). In December, 2012, HHS published the Proposed Advanced Notice of Benefit and Payment Parameters (77 FR 73118), which included a number of changes to the regulations related to the premium stabilization programs as well as changes to implementing regulations for certain other provisions of the ACA, including the advance payments of the premium tax credit, cost-sharing reductions, Exchanges, (including the Small Business Health Options Program (SHOP) Exchanges), and Medical Loss Ratio requirements. Prepared by Health Policy Alternatives, Inc. Page 2
On March 11, 2013, CMS also published an interim final rule with comment, the Patient Protection and Affordable Care Act; Amendments to the HHS Notice of Benefit and Payment Parameters (78 FR 15541-15552). Among other purposes, this IFR provides for adjustment to the risk corridors calculations to align such calculations with the single risk pool provision that was finalized in the February 27, 2013 Health Insurance Market Rules (78 FR 12406-13492). The risk corridor provisions of this IFR are included in this summary. Comments are due by April 30, 2013. In the final rule s preamble, HHS reviews the relevant ACA statutory and regulatory history. It notes that HHS, Labor, and Treasury are working in close coordination to release guidance related to Exchanges in several phases. The following table identifies relevant prior regulations and guidance. 1 ACA Provisions Prior Regulations or Guidance Date of Publication in the Federal Register Premium Stabilization Risk Proposed rule: July 15, 2011 (76 FR 41930) adjustment; reinsurance and Final rule: March 23, 2012 (77 FR 17220) risk corridors Proposed Advance Notice of Benefit and Payment Parameters: December 7, 2012 (77 FR 73118) Risk Adjustment White paper: September 12, 2011 Bulletin on intended HHS approach to implementing risk adjustment on behalf of a state : May 31, 2012 Public Meeting: May 7-8, 2012 Reinsurance Bulletin on intended HHS approach to implementing reinsurance program on behalf of a state: May 31, 2012 Cost Sharing Reductions Bulletin on intended HHS approach to calculating actuarial value and implementing cost-sharing reductions: February 24, 2012 Proposed Rule: August 17, 2011 (76 FR 50931) Final Rule: May 23, 2012 (77 FR 30377 or 26 CFR 1 and 602) Advance Payments of the Premium Tax Credit Exchanges Request for Comment: August 3, 2010 (75 FR 45584). An Initial Guidance to States on Exchanges: November 18, 2010 Proposed Rule: July 15, 2011 (76 FR 41866) Proposed Rule re: specific functions in the individual market, eligibility determinations, and Exchange standards for employers: August 17, 2011(76 FR 51202) Final Rule on establishment of Exchanges: March 27, 2012 (77FR 18310) Proposed rule on eligibility, hearing and appeals provisions: January 22, 2013 (78 FR 4594) Market reform rules Proposed Rule: November 26, 2012 (77 FR 70584) Final Rule: February 27, 2013 (78 FR 13406) Essential Health Benefits and Proposed rule: November 26, 2012 ( 77 FR 70644) Actuarial Value Final Rule: February 25, 2013 (78 FR 12834) Medical Loss Ratio Request for Comment: April 14, 2010 (75 FR 19297) Interim Final Rule with Comment Period: December 1, 2010 (75 FR 74864). Interim Final Rule with Comment Period: December 7, 2011 (76 FR 1 The table was prepared by Health Policy Alternatives based on the text of the final rule. Prepared by Health Policy Alternatives, Inc. Page 3
ACA Provisions Prior Regulations or Guidance Date of Publication in the Federal Register 76596) Final rule with Comment period : December 7, 2011 (76 FR 76594) Final Rule: May 16, 2012 (77 FR 28790) II. PROVISIONS OF THE PROPOSED RULE HHS received approximately 420 comments from a wide range of stakeholders in response to the proposed rule. On the rulemaking process itself, some asked that the comment period be extended to 60 days. In response, HHS says that the 30-day comment period provided adequate opportunity to provide comment. In response to those who asked that HHS monitor and oversee the implementation of the premium stabilization programs, HHS says that it takes seriously its responsibility to do that in order to protect consumers, prevent fraud and abuse, and ensure that the programs achieve their goals. HHS will provide further detail on the oversight of these programs in future rulemaking and guidance. A. Provisions of the State Notice of Benefit and Payment Parameters ( 153.100) Under 153.100(c), in the case of a state that seeks to modify the parameters for its reinsurance or risk adjustment methodology, the deadline to publish its state notice of benefit and payment parameters is March 1 of the calendar year prior to the applicable benefit year. Given potential difficulties of states meeting this deadline for the initial benefit year of 2014, CMS had proposed to modify 153.100(c), to require that, for benefit year 2014 only, the notice be published by March 1, 2013, or by the 30 th day following publication of the final HHS notice of benefit and payment parameters, whichever was later. If a state that chose to operate reinsurance or risk adjustment failed to publish the required notice within that timeframe, it would have to: (1) adhere to the data requirements for health insurance issuers to receive reinsurance payments that were specified in the annual HHS notice of benefit and payment parameters for the applicable benefit year; (2) forgo the collection of additional reinsurance contributions under 153.220(d) and the use of additional funds for reinsurance payments under 153.220(d)(3); (3) forgo the use of more than one applicable reinsurance entity; and (4) adhere to the risk adjustment methodology and data validation standards published in the annual HHS notice of benefit and payment parameters. Final Rule. Given the timing of this final rule and its effective date (60 days after its publication), HHS is finalizing its proposed policy that, for 2014 only, a state must publish its notice of benefit and payment parameters by the 30th day following publication of the final rule by deeming the March 1 deadline specified in the existing regulation to be extended until the date that is 30 days after publication of the final rule. (Commenters varied in whether they supported such an extension.) B. Provisions and Parameters for the Permanent Risk Adjustment Program HHS notes that the risk adjustment program is a permanent program that transfers funds from lower risk, non-grandfathered plans to higher risk, non-grandfathered plans in the individual and small group markets, in and outside of the Exchanges. Based on HHS communications with Prepared by Health Policy Alternatives, Inc. Page 4
states, as of February 25, 2013, Massachusetts is the only state electing to operate a risk adjustment program for the 2014 benefit year. Under section III.B.1 of the proposed rule, HHS proposed standards for HHS approval of a stateoperated risk adjustment program (regardless of whether a state elected to use the HHS developed methodology or an alternate, federally certified risk adjustment methodology). Under III.B.2 of the proposed rule, HHS proposed a fee to support its operation of the risk adjustment program. In section III.B.3, HHS proposed a methodology for its use when operating a risk adjustment program on behalf of a state. States operating a risk adjustment program could use this methodology, or submit an alternate methodology, in a process described in III.B.4. of the proposed rule. In section III.B.5, HHS proposed and described a data validation process to use when operating a risk adjustment program on behalf of a state. A discussion of these proposals and how HHS has addressed them follows. 1. Approval of State-Operated Risk Adjustment a. Risk Adjustment Approval Process ( 153.310) HHS had proposed to add 153.310(a)(4) based on its authority in 1321(a) of the ACA relating to standards for operation of risk adjustment programs and 1343(b) on criteria and methods to be used in carrying out risk adjustment activities. Beginning in 2015, HHS would carry out the risk adjustment functions on behalf of a state if the state was not approved by HHS (i.e., it was found not to meet the standards proposed in 153.310(c)) to operate a risk adjustment program prior to publication of its notice of benefit and payment parameters. New proposed paragraph (c) set forth a state s responsibilities with regard to risk adjustment program operations. A state operating a risk adjustment program would have to administer it through an entity meeting certain standards to ensure that such entity had the capacity to operate the program throughout the benefit year. Specifically: 1. The entity must be operationally ready to implement the applicable federally certified risk adjustment methodology and process the resulting payments and charges; and has experience relevant to operating the risk adjustment program. 2. The entity complies with all applicable federal provisions in the administration of the applicable federally certified risk adjustment methodology. 3. The state must conduct oversight and monitoring of its risk adjustment program. (In the preamble, HHS had proposed to examine the state s monitoring plan, including the state s requirements for data integrity and maintenance of records, and the state s standards for use of risk adjustment payments.) 2 Under proposed 153.310(d), a state would be required to submit to HHS information, in a form and manner specified by HHS, that it and its risk adjustment entity meet the above requirements. 2 HHS plans to provide more detail about oversight in future rulemaking. Prepared by Health Policy Alternatives, Inc. Page 5
Final Rule. Commenters generally agreed with the proposed approach to approving state risk adjustment programs beginning in benefit year 2015. HHS is finalizing these provisions as proposed. b. Risk Adjustment Approval Process for Benefit Year 2014 Given the unique timing issues for approving a state-operated risk adjustment program for benefit year 2014, HHS had proposed a transitional policy. A state would not be required to obtain approval for 2014. Instead, HHS would request that a state planning to operate its own program consult with HHS to determine its capacity to do so. The state would identify the entity selected to operate risk adjustment, and describe its plans for risk adjustment operations. For 2015 and thereafter, states would have to obtain formal approval under the proposed process but ongoing consultations between HHS and states and their selected risk adjustment entities were envisioned. Through these consultations, states and entities would get feedback from HHS on whether they were adequately demonstrating the capacity of the entity to operate all risk adjustment functions. In the case of a state that failed to produce the requested evidence or make the requested changes in the specified timeframe, HHS could determine that the relevant criteria were not met, and could decline to approve that state s risk adjustment program. Final Rule: HHS had proposed the transitional policy based on the unique circumstances of 2014, and does not anticipate extending it to future years. Although mindful of concerns expressed by some commenters that states may not be fully ready to operate a complex risk adjustment program for benefit year 2014, HHS notes that each aspect of a state s operations (including data collection) must be performed in line with one of the federally certified risk adjustment methodologies published in this final rule. Any state that begins operation of risk adjustment under this transitional process must obtain formal certification for benefit year 2015. HHS believes this process is sufficiently robust to ensure any state operating risk adjustment in 2014 will be prepared to do so. 2. Risk Adjustment User Fees ( 153.610(f)) Under the proposed rule, if a state was not approved by HHS to operate or chose to forgo operating its own risk adjustment program, HHS would operate risk adjustment on the state s behalf. HHS indicated its intent to collect a user fee to support the administration of HHSoperated risk adjustment. The fee would apply to issuers of risk adjustment covered plans in states in which HHS was operating the risk adjustment program. HHS referenced federal policy under Circular No. A-25R with respect to collection of these user fees. The user fees would be determined based on the costs to HHS of administering risk adjustment programs on behalf of states. These include the costs of contracts to develop the model and methodology, as well as for collections, payments, account management, data collection, program integrity and audit functions, operational and fraud analytics, stakeholder training, and operational support. Federal personnel costs would not be included. HHS would set the user fee rate as a national per capita rate so as to spread the cost of the program across issuers of risk adjustment covered plans based on enrollment. Specifically, the Prepared by Health Policy Alternatives, Inc. Page 6
projected total costs for HHS to administer the risk adjustment programs on behalf of states would be divided by the expected number of enrollees in risk adjustment covered plans in HHSoperated risk adjustment programs. An applicable issuer would, therefore, pay a user fee equal to the product of its annual plan enrollment multiplied by the annual per capita risk adjustment user fee rate specified in the annual notice of benefit and payment parameters for the applicable benefit year. Total user fees charged to each issuer would be calculated based on the issuer s monthly enrollment, as provided to HHS using the data collection approach for the risk adjustment program (see below). HHS would collect user fees in June of the year after the applicable benefit year and explained the rationale for this timeframe. The total cost for HHS to operate the risk adjustment program on behalf of states for 2014 was estimated to be less than $20 million; the per capita risk adjustment user fee would be no more than $1.00 per enrollee per year. Final Rule. In response to comments, HHS is adding 153.610(f), finalizing the risk adjustment user fee assessment and collection approach as proposed. HHS clarifies that enrollment data for each month will be captured by the servers used in the distributed data collection approach. HHS is also finalizing a per capita user fee rate in the annual HHS notice of benefit and payment parameters using the proposed methodology. The user fee will be determined by dividing HHS s total contract costs for risk adjustment operations in the applicable benefit year by the expected annual enrollment in risk adjustment covered plans for that benefit year. Based on this methodology, for benefit year 2014, the per capita annual user fee rate is $0.96, which HHS will apply as a per-enrollee-per-month risk adjusted user fee of $0.08. Finally, HHS responds to concerns about the cost implications of the user fee by noting that it is solely for the purpose of funding the costs to HHS of operating the federal risk adjustment program and HHS intends to keep the fee as low as possible. 3. Overview of the Risk Adjustment Methodology HHS Will Implement When Operating Risk Adjustment on Behalf of a State The HHS proposed risk adjustment methodology, finalized with some changes in this rule, is based on the premise that premiums should reflect the differences in plan benefits and plan efficiency, not the health status of the enrolled population. In the proposed rule, HHS reprised from its Premium Stabilization rule (see 153.20), that a risk adjustment methodology is made up of the following elements: The risk adjustment model uses an individual s recorded diagnoses, demographic characteristics, and other variables to determine a risk score, which is a relative measure of how costly that individual is anticipated to be. The calculation of plan average actuarial risk and the calculation of payments and charges average all individual risk scores in a risk adjustment covered plan, make certain adjustments, and calculate the funds transferred between plans. In this proposed rule, these are presented together as the payment transfer formula. Prepared by Health Policy Alternatives, Inc. Page 7
The data collection approach, which is the distributed model for obtaining the data need for the risk adjustment model and the payment transfer formula. The schedule for the risk adjustment program describes the timeframe for risk adjustment operations. States approved to operate risk adjustment may utilize this risk adjustment methodology, or they may submit an alternate methodology. HHS noted that the risk adjustment methodology addresses three considerations: (1) the newly insured population; (2) plan metal levels and permissible rating variation; and (3) the need for inter-plan transfers that net to zero. The key feature of the HHS risk adjustment methodology is that the risk score alone does not determine whether a plan is assessed charges or receives payments. Transfers depend not only on a plan s average risk score, but also on its plan-specific cost factors relative to the average of these factors within a risk pool within a state. The HHS risk adjustment methodology: Is developed on commercial claims data for a population similar to the expected population to be risk adjusted; Uses the hierarchical condition categories ( HCC ) grouping logic used in the Medicare population, with HCCs refined and selected to reflect the expected risk adjustment population; Calculates risk scores using a concurrent model (current year diagnoses predict current year costs); Establishes 15 risk adjustment models, one for each combination of metal level (platinum, gold, silver, bronze, catastrophic) and age group (adults, children, infants); Results in balanced payment transfers within a risk pool within a market within a state; Adjusts payment transfers for plan metal level, geographic rating area, induced demand, and age rating, so that transfers reflect health risk and not other cost differences; and Transfers funds between plans within a market within a state. Final Rule: HHS is finalizing the methodology that it will use when operating the risk adjustment program as proposed with the following modifications: Individuals over 64 have been added in the demographic factors; The cost-sharing reduction (CSR) adjustment factors have been updated for zero costsharing plan variations to align with the induced demand factors used in the CSR program; Technical corrections have been made to the payment transfer formula; HHS has clarified that geographic cost factors will be calculated for each risk pool in each market in a state; and HHS has clarified how transfers will be calculated at the plan level. In response to comments about HHS general approach and whether the risk adjustment methodology will be sufficiently robust, HHS says that it has worked to customize to the ACA context the Medicare Parts C and D methodology and although it anticipates making future Prepared by Health Policy Alternatives, Inc. Page 8
adjustments to the model, it seeks to balance stakeholders desire for a stable model in the initial years with introducing model improvements as additional data become available. HHS intends to engage stakeholders throughout this process. a. Risk Adjustment Applied to Plans in the Individual and Small Group Markets ( 153.20); 153.360 HHS had proposed definition changes in 153.20 for the following: Risk adjustment covered plan is defined in the current regulation text as health insurance coverage offered in the individual or small group markets, excluding plans offering excepted benefits and certain other plans, including any other plan determined not to be a risk adjustment covered plan in the annual HHS notice of benefit and payment parameters. HHS proposed to replace the text in quotes with and any plan determined not to be a risk adjusted covered plan in the applicable federally certified risk adjustment methodology. Under this revised definition, HHS would describe any plans not determined to be risk adjustment covered plans under the HHS risk adjustment methodology in the annual notice of benefit and payment parameters, which is subject to notice and comment. Plans Not Subject to Market Reforms. CMS proposed how to treat plans that are not subject to the market reforms (see the November 26, 2012 Market Reform and Essential Health Benefits and Actuarial Value proposed rules) for purposes of risk adjustment and describes related policy decisions. 3 (States could propose different approaches to these plans and to risk pooling in state alternate methodologies, subject to the requirements established at 153.330(b) in the proposed rule.) HHS also explained its proposed approach to risk adjustment when states elect to merge the risk pools of their individual and small group markets. Finally, HHS explained its proposed risk adjustment approach in the case of an issuer licensed in one state but with enrollment in another state. HHS observed that plans not subject to the ACA market reform rules are able to effectively minimize actuarial risk (because, for example, they do not have to accept all applicants on a guaranteed issue basis) and, therefore, should not be subject to risk adjustment charges nor receive risk adjustment payments. In addition, they would not be subject to the issuer requirements in subparts G and H. Those plans issued in 2013 that are subject to the market reform requirements upon renewal, however, would be subject to risk adjustment (and the related requirements) upon renewal. Student health plans: HHS proposed that these not be subject to risk adjustment and related requirements. Catastrophic plans: Because of the unique characteristics of this population (e.g., under 30 or individuals for whom insurance is deemed unaffordable), HHS proposed to establish criteria and methods to risk adjust catastrophic plans in a separate risk pool from the general (metal level) risk pool. The specific mechanisms for assessing risk, and for calculating payments and charges, were described. These plans would also be 3 See the final market reform rules in the February 27, 2013 Federal Register (78 FR 13406). Prepared by Health Policy Alternatives, Inc. Page 9
required to comply with related risk adjustment program requirements under subparts G and H. Merger of Markets: If a state elected to merge its individual and small group markets and if HHS was operating risk adjustment for that state, HHS would apply risk adjustment to a single merged pool. In such a case, rather than transferring funds between individual market plans only and between small group market plans only, HHS would transfer funds between all individual and small group market plans, considered as one market. In this case, the state average premium would be the average premium of all applicable individual and small group market plans in the applicable risk pool, and normalization would occur across all plans in the applicable risk pool in the individual and small group market. Risk adjustment in state of licensure: Risk adjustment is a state-based program and requirements may differ from state to state. However, a plan licensed in a state (and therefore subject to that state s rate and benefit requirements) may enroll individuals in multiple states. To help ensure that policies in the small group market were subject to risk adjustment programs linked to the state rate and benefit requirements applicable to that policy, HHS proposed in 153.360 that a risk adjustment covered plan be subject to risk adjustment in the state in which the policy was filed and approved. Final Rule. HHS is finalizing these provisions as proposed but with a clarification that risk adjustment covered plans in the small group market will be subject to risk adjustment in the state in which the employer s policy is filed and approved. That clarification is in response to comments. HHS also received comments that expressed support for its proposed approach to student health plans, plans not subject to market reform rules, and catastrophic plans. Several urged HHS to align the single risk pool approach to student health plans with the proposed approach in risk adjustment. Some expressed concern that separately risk adjusting catastrophic plans would prevent the enrollees in these plans from contributing to the general risk pool. HHS notes that provisions related to the single risk pool provision were finalized in the Market Reform Rule (see February 27, 2013 Federal Register). b. Overview of the Risk Adjustment Model As detailed more below, each proposed HHS risk adjustment model predicts plan liability for an enrollee based on that person s age, sex, and diagnoses (risk factors), producing a risk score. HHS had proposed separate models for adults, children, and infants to account for cost differences in each of these age groups. The adult and child models are additive; i.e., the relative costs assigned to an individual s age, sex, and diagnoses are added together to produce a risk score. Infant risk scores are determined by inclusion in one of 25 mutually exclusive groups based on the infant s maturity and the severity of its diagnoses. If applicable, the risk score is multiplied by a cost-sharing reduction adjustment. The enrollment-weighted average risk score of all enrollees in a particular risk adjustment covered plan within a geographic rating area are then input into the payment transfer formula, as Prepared by Health Policy Alternatives, Inc. Page 10
described in section III.B.3.c. of the proposed rule, to determine an issuer s payment or charge for a particular plan. Each HHS risk adjustment model predicts individual-level risk scores, but is designed to predict average group costs to account for risk across plans. This method accords with the Actuarial Standard Board s Actuarial Standard of Practice for risk classification. HHS is finalizing the risk adjustment models with modifications: a typographical error was fixed to include individuals over 64 in the demographic factors; HHS has clarified the calculation of age for infants who were born in one benefit year and discharged in the following benefit year, and the CSR adjustment factors have been adjusted to align with the induced demand factors used in the CSR program. (1) Data Used to Develop the HHS Risk Adjustment Models Each HHS risk adjustment model was calibrated using de-identified data 4 for individuals living in all states, aged 0-64 enrolled in commercial insurance plans. The proposed rule s preamble provided information on the specific data base and its contents as well as decision rules related to classification of enrollees in different types of plans. This information is restated here (although it is not described again in the final rule). Diagnoses for model calibration were extracted from facility and professional claims (with certain exceptions). The concurrent model sample (approximately 20 million individuals) was generated using the following criteria: (1) the enrollee had to be enrolled in a fee-for-service (FFS) plan; (2) the enrollee must not have incurred any claims paid on a capitated basis; and (3) the enrollee must have been enrolled in a plan with drug benefits and mental health and substance abuse coverage. 5 The final database reflected HHS s best approximation of the ACA s essential health benefits package, which also includes prescription drug and mental health and substance abuse coverage. Inpatient, outpatient, and prescription drug expenditures for each enrollee were calculated by summing gross covered charges in, respectively, the inpatient, outpatient, and prescription drug services files. 6 Plan liability expenditures for a given plan type (platinum, gold, silver, bronze, catastrophic) were defined by applying the applicable standardized benefit design to total expenditures. To more accurately reflect expected expenditures for 2014, the 2010 total expenditures were increased for projected cost growth. Average monthly expenditures were defined as the enrollee s expenditures for the enrollment period divided by the number of enrollment months. Annualized expenditures (total or plan liability) were defined as average monthly expenditures multiplied by 12. Data for each individual was weighted by months of enrollment divided by 12. HHS explained in the proposed rule s preamble that the HHS risk adjustment model is a concurrent model, taking diagnoses from a given period to predict cost in the same period. It proposed using a concurrent model (as opposed to the more typically used prospective model) 4 Truven Health Analytics 2010 MarketScan Commercial Claims and Encounters database (MarketScan) 5 HHS explained that it limited the modeling sampling to enrollees in FFS plans because costs on non-ffs claims may not represent the full cost of care associated with a disease. 6 Gross covered charges equals submitted charges minus non-covered charges minus pricing reductions. Prepared by Health Policy Alternatives, Inc. Page 11
because 2013 diagnostic data would not be available for use in the model in 2014; also it would be better able to handle expected changes by individuals from one plan to another or between programs because individuals newly enrolling in health plans may not have prior data available that can be used for risk adjustment. HHS also noted that it was not including prescription drug use as a predictor in each HHS risk adjustment model because inclusion of such information (which may be useful for predicting expenditures) could create adverse incentives to modify discretionary prescribing. Final Rule. HHS notes that in response to comments in support or opposition to the inclusion of prescription drug data, it is finalizing the proposal to exclude such data for the initial HHS risk adjustment models but will consider how they could be included in future models. In response to comments in support or opposed to the concurrent approach, HHS reiterates the rationale for retaining it in the final rule but it plans to investigate the feasibility of transitioning to a prospective approach in the future. In response to comments on HHS approach to account for infant claims if there is no separate infant birth claim from which to gather diagnoses, HHS says that if an infant claim cannot be separated, HHS will assign the infant to the lowest severity category and the term maturity category. HHS does not intend to unbundle claims in operation. (2) Principles of Risk Adjustment and the Hierarchical Condition Category (HCC) Classification System HHS had proposed to use a diagnostic classification system. This determines which diagnosis codes should be included, how the diagnosis codes should be grouped, and how the diagnostic groupings should interact for risk adjustment purposes. The ten principles that had been used to develop the hierarchical condition category (HCC) classification system for the Medicare risk adjustment model guided the creation of the proposed HHS risk adjustment model and these were described in the preamble of the proposed rule. HHS explained in the proposed rule that the risk adjustment model for the individual and small group markets is referred to as HHS HCCs. The CMS HCC diagnostic classification (which is used for Medicare Part C plans) provided the diagnostic framework for the classification and selection of HCCs for the HHS risk adjustment model. The CMS HCC classification system was reviewed and adapted to account for the different population to create the HHS HCC classification. Three major characteristics of that classification system required modification for use with the HHS risk adjustment model: (1) population; (2) type of spending; and (3) prediction year. The CMS HCCs were developed using data from the aged and/or disabled Medicare population. Although every ICD-9-CM diagnosis code is mapped and categorized into a diagnostic grouping, for some conditions (such as pregnancy) the sample size in the Medicare population is quite low. With larger sample sizes in the commercial population, HCCs were reexamined for infant, child, and adult subpopulations. Additionally, the CMS HCCs are configured to predict medical spending, while HHS HCCs predict both medical and drug spending. Finally, the CMS HCC classification is primarily designed for use with a prospective risk adjustment model. Each HHS risk adjustment model is concurrent, using current year Prepared by Health Policy Alternatives, Inc. Page 12
diagnoses and demographics to predict the current year s spending. Medical conditions may predict current year costs that differ from future costs; HCC and DXG groupings should reflect those differences. HHS explained that in designing the diagnostic classification for the HHS risk adjustment model, certain principles (7, 8 and 9) were prioritized. HHS selected 127 of the full classification of 264 HHS HCCs for inclusion in the HHS risk adjustment model, choosing those HCCs that were more appropriate for a concurrent model or for the expected risk adjustment population (e.g., low birth weight babies were included). The following criteria were used to determine which HCCs should be included: Whether the HCC represents clinically significant medical conditions with significant costs for the target population; Whether a sufficient sample size exists to ensure stable results for the HCC; Whether excluding the HCC would exclude (or limit the impact of) diagnoses particularly subject to discretionary coding; Whether the HCC identifies chronic or systematic conditions that represent insurance risk selection or risk segmentation, rather than random acute events; Do not represent poor quality of care; and Whether the HCC is applicable to the model age group. Consistent with the ten risk adjustment principles, each HHS risk adjustment model excludes HHS HCCs containing diagnoses that are vague or nonspecific (for example, symptoms), discretionary in medical treatment or coding (for example, osteoarthritis), or not medically significant (for example, muscle strain). Also excluded are HHS HCCs that do not add to costs. To balance the competing goals of improving predictive power and limiting coding variability to create a relatively simple risk adjustment model, a number of HHS HCCs were grouped into sets equivalent to a single HCC. CMS explained the rationale for such groupings (e.g., to reduce model complexity or limit up-coding by severity within an HCC hierarchy). After grouping, the number of HHS HCCs included in the proposed HHS risk adjustment model was effectively reduced from 127 to 100. Final Rule. HHS is finalizing the HHS HCC classification system as proposed as well as the HHS HCCs that are included in the HHS risk adjustment models. Several comments supported the classification system. Some wanted HHS to provide the ICD-9 codes included in each HHS HCC. This information is at: https://cciio.cms.gov/resources/files/ra_instructions_proposed_1_2013.pdf and http:// cciio.cms.gov/resources/files/ra_tables_proposed_1_2013.xlsx. HHS intends to provide a final version of these documents to reflect the HHS risk adjustment models in the future. In response to requests for the classification of ICD-10s to HHS HCCs, HHS reports that it is completing the mapping process and will release this information in future guidance. In response to those who asked for additional HHS-HCCs to be included in the models, HHS says that it has finalized the proposal and no new ones have been added. Prepared by Health Policy Alternatives, Inc. Page 13
(3) Factors Included in the Risk Adjustment Models In the proposed rule s preamble, HHS explained that, in addition to the HHS HCCs included in the HHS risk adjustment model, enrollee risk scores would be calculated from demographic factors. There are 18 age/sex categories for adults, and 8 age/sex categories for children. (Age/sex categories for infants are not used.) Adults are defined as ages 21+, children are ages 2-20, and infants are ages 0-1. The age categories for adult male and female are ages 21-24, 25-29, 30-34, 35-39, 40-44, 45-49, 50-54, 55-59, and 60+. The age categories for children male and female are ages 2-4, 5-9, 10-14, and 15-20. Age would be defined as age as of the enrollee s last day of enrollment in risk adjustment covered plans within an issuer in the applicable benefit year. For individuals without any of the HHS HCCs included in the proposed HHS risk adjustment model, predicted expenditures would be based solely on their demographic risk factors. In the calibration data set, 19% of adults, 9% percent of children, and 45% of infants had HCCs included in the risk adjustment models. Because of the inherent clinical and cost differences in the adult (age 21+), child (age 2-20), and infant (age 0-1) populations, HHS developed separate risk adjustment models for each age group. The models for adults and children generally have similar specifications, including demographic age/sex categories and HHS HCCs, but differ slightly due to clinical and cost differences. However, infants have certain costs related to hospitalization at birth and can have severe and expensive conditions that do not apply to adults or children, while having relatively low frequencies for most HHS HCCs included in the model compared to adults and children. Therefore, HHS proposed a separate infant model and described its specifications, which involve assigning infants a maturity category (by gestation and birth weight) and a severity category. Final Rule. HHS notes comments that it received suggesting that the weights of specific factors in the HHS risk adjustment models were lower than expected. Some commenters asked that age be calculated at the time of enrollment rather than as of the enrollee s last day of enrollment some wanted the age for newborns to be defined as the date of birth rather than the age as of the last day of enrollment in a plan. Still others supported the inclusion of a demographic factor to account for individuals age 65 or older or asked that the models include additional factors such as income, receipt of care from an essential community provider, and enrollee language. In response, HHS says that its models were calibrated using age as of the last month of enrollment due to data limitations. To align with model calibration, an enrollee s age for risk score calculation will be the age as of the enrollee s last day of enrollment in a risk adjustment covered plan in the applicable benefit year (for enrollees in program operation). HHS is clarifying its approach to calculating the age of infants who are born in a benefit year but are not discharged until the following year. In such a case, the infant will be defined as age 0 for both benefit years. For example, if an infant is born in December of 2014 but has a discharge date of January 2015, the infant would be assigned age 0 for purposes of risk score calculation in benefit year 2014 and for the entire 2015 benefit year. With respect to older enrollees, HHS is making a typographical correction to re-label the highest adult age factor as 60+. Because data for individuals 65 or older is not captured in the calibration dataset, the estimation of a separate demographic factor for those 65 or older is impractical at this time. HHS says that are factors Prepared by Health Policy Alternatives, Inc. Page 14
such as income are also not feasible to include due to data limitations. (Tables 2, 4, and 5 contain the final factors for the HHS risk adjustment models at 78 FR 15422-15428.) (4) Adjustments to Model discussed in the Risk Adjustment White Paper In the Risk Adjustment White Paper, HHS had discussed the possibility of including adjustments to the HHS risk adjustment model to account for cost-sharing reductions and reinsurance payments and sought comment. In the proposed Notice of Benefit and Payment Parameters, HHS had proposed to include an adjustment for the receipt of cost-sharing reductions in the model, but not to adjust for receipt of reinsurance payments in the model. HHS rationale was that under the ACA, enrollees in individual market plans in Exchanges are eligible for cost sharing reductions based on their income and/or Indian status. Such individuals may utilize health care services at a higher rate than would be the case in the absence of cost-sharing reductions. This higher utilization (to the extent not covered by required cost sharing by the enrollees or cost-sharing reductions reimbursed by the federal government) would neither be paid by cost sharing reductions nor built into premiums. The cost sharing reduction adjustment to the HHS risk adjustment models would be based on the adjustment for induced demand for advanced payment of cost-sharing reductions. Regarding reinsurance, HHS said that adjusting for the ACA s reinsurance payments in the HHS risk adjustment model would address concerns that reinsurance and risk adjustment could compensate twice for the same high-risk individuals. It rejected such an adjustment, however, because: (1) removing reinsurance payments would reduce protections for issuers of reinsurance-eligible plans that enroll high-cost individuals: (2) it would be difficult to determine what portion of reinsurance payments were made for conditions included in each HHS risk adjustment model, and the appropriate model adjustment for these payments; and (3) the size of the reinsurance pool declines over its three-year duration and this would require the methodology to account for reinsurance payments to be modified each year for the HHS risk adjustment model. Final Rule. HHS finalizes the CSR adjustment factor as proposed but revises it to correct a typographical error and align with the CSR adjustment later in the rule for enrollees in zero costsharing plan variations. (See table 1 as reproduced below). HHS also finalizes its proposal not to adjust the HHS risk adjustment models for payments from the temporary reinsurance program. Cost Sharing Reduction Adjustment Household Income Plan Actuarial Value (AV) Induced Utilization Factor Silver Plan Variant Recipients 100-150% of FPL Plan variation 94% 1.12 150-200% of FPL Plan variation 87% 1.12 200-250% of FPL Plan variation 73% 1.00 >250% of FPL Plan variation 70% 1.00 Zero Cost-Sharing Recipients <300% of FPL Platinum (90%) 1.00 <300% of FPL Gold (80%) 1.07 <300% of FPL Silver (70%) 1.12 <300% of FPL Bronze (60%) 1.15 >300% of FPL Limited Cost-Sharing Recipients 1.00 Table 1. 78 FR 15421 Prepared by Health Policy Alternatives, Inc. Page 15
(5) Model Performance Statistics The standard way to evaluate whether a risk adjustment model performs well is to assess its predictive accuracy. The statistic (R-Squared or R 2 ) calculates the percentage of individual variation explained by a model overall. Predictive ratios are used to measure the predictive accuracy of a model for different validation groups or subpopulations. The ratio represents how well the model does on average at predicting plan liability for that subpopulation. A subpopulation that is predicted perfectly would have a predictive ratio of 1.0. In the proposed rule s preamble, HHS stated that for each of its risk adjustment models, the R 2 and the predictive ratio are in the range of published estimates for concurrent risk adjustment models. Final Rule. The R 2 s for the HHS risk adjustment models are displayed in Table 8 of the final rule (78 FR 15430). They range from a low of.288 for the bronze adult model and a high of.36 for the platinum adult model. HHS also says that the predictive ratios for the overall samples for each of the 15 models are within the range of estimates for other health risk adjustment models. (6) Summary of Models In the final rule, HHS provides a summary of the final HHS risk adjustment models and references data tables where the demographic and diagnosis factors are displayed (see 78 FR 15422 et seq.). c. Overview of the Payment Transfer Formula In the preamble to the proposed rule, HHS provided a high level explanation of its approach to making payments to issuers with above average actuarial risk and collecting payments from plans with below average actuarial risk as measured by the HHS risk adjustment models. Payments and charges were referred to as transfers. HHS defined the calculation of plan average actuarial risk and the calculation of payments and charges in the Premium Stabilization Rule. These concepts were combined in a risk adjustment payment transfer formula. HHS proposed to calculate risk adjustment transfers after the close of the applicable benefit year, following the completion of issuer risk adjustment data reporting. Under 153.310(e), as proposed to be renumbered, HHS would invoice issuers of risk adjustment covered plans for transfers by June 30 of the year following the applicable benefit year. The proposed payment transfer formula included a set of cost adjustment terms that would require transfers to be calculated at the geographic rating area level for each plan (thus, two separate transfer amounts would be calculated for a plan that operates in two rating areas). Payment transfer amounts would be aggregated at the issuer level (i.e., at the level of the entity licensed by the state) such that each issuer would receive an invoice and a report detailing the basis for the net payment that would be made or the charge that would be owed. The invoice Prepared by Health Policy Alternatives, Inc. Page 16